Why Did volatility-in-2025-was-twice-that-of-bitcoins">Bitcoin and Stocks Sell Off After US Inflation Cooled?

After US inflation came in lower than expected, both Bitcoin and stock prices initially rose but then quickly fell. This sudden drop happened because of how trading and large investors reacted in the short term, not because of the inflation news itself.

What happened

In April 2024, the U.S. Bureau of Labor Statistics released Consumer Price Index data showing a slowdown in the annual inflation rate compared to previous months. This cooling of inflation was broadly interpreted as positive macroeconomic news, suggesting that price pressures were easing.

Contrary to expectations that such data would spur buying, both Bitcoin and major U.S. stock indices experienced a sharp selloff shortly after the announcement. Initial price moves showed some upward reaction, but these gains quickly reversed, leading to a rapid decline in both asset classes.

Market observers noted that liquidity conditions were thin during the selloff, with increased volatility evident in intraday trading sessions. Reports from Bloomberg highlighted that trading volumes were dominated by algorithmic and high-frequency trading (HFT) firms, which respond within milliseconds to macroeconomic data releases.

Crypto markets, in particular, showed elevated leverage levels through margin trading and derivatives, as reported by major exchanges including Binance. This leverage amplified price movements, with forced liquidations likely contributing to the downward pressure.

Analysis from BeinCrypto and Bloomberg suggested that the selloff reflected complex market microstructure dynamics rather than a straightforward fundamental reaction. Algorithms and short-term traders may have interpreted the inflation cooling as a signal that the Federal Reserve could pause or slow rate hikes, prompting repositioning and profit-taking. This behavior, combined with thin liquidity, likely exacerbated price declines.

Additional interpretations include the possibility of a "buy the rumor, sell the fact" phenomenon, where markets had priced in the inflation cooling ahead of the release, leading to profit-taking once the data was confirmed.

Why this matters

This episode illustrates how short-term trading dynamics and market microstructure can produce counterintuitive price moves that diverge from fundamental economic signals. Even positive macroeconomic data can trigger selloffs when liquidity is low and algorithmic trading dominates volume.

The prominence of algorithmic trading and HFT in both equity and crypto markets means that price reactions are often driven by automated strategies reacting to order flow imbalances and technical signals rather than purely by news fundamentals. This can lead to transient price dislocations that may confuse investors focusing solely on economic data.

In crypto markets, elevated leverage magnifies these effects. Forced liquidations from margin calls can accelerate downward price moves, creating feedback loops that intensify volatility. Understanding these mechanics is critical for market participants and policymakers aiming to assess market stability and the transmission of macroeconomic news into asset prices.

More broadly, this event underscores the complexity of modern markets where microstructure factors interplay with macroeconomic developments. It challenges the assumption that positive economic news will invariably lead to immediate price appreciation, highlighting the importance of liquidity, trading algorithms, and leverage in shaping short-term market behavior.

What remains unclear

Despite these insights, several key questions remain unanswered due to limitations in publicly available data. The precise mechanisms by which specific algorithmic trading strategies interpret and react to macroeconomic data releases in real time are not disclosed. This obscures understanding of how much of the selloff was driven by programmed responses versus discretionary trading.

The relative contribution of retail versus institutional algorithmic trading to the observed price moves immediately following the inflation data is also unknown. Similarly, granular data on leverage-induced liquidations in crypto markets around the inflation release is not publicly available, making it difficult to quantify their direct impact on the selloff.

Furthermore, the role of large institutional funds and ETF issuers in adjusting portfolios in response to the inflation data—and whether such adjustments contributed materially to short-term price dislocations—remains unclear. Real-time disclosures on portfolio rebalancing tied to macroeconomic releases are limited.

Finally, the interaction between fundamental macroeconomic signals and market microstructure factors is complex and only partially understood, with much of the current interpretation based on inference rather than direct measurement.

What to watch next

• Upcoming U.S. inflation data releases and their immediate market impact, to assess if similar microstructure-driven price dynamics recur.
• Regulatory developments or disclosures concerning algorithmic and high-frequency trading practices, which may shed light on their role in market volatility.
• Crypto exchange reports and filings providing more detailed data on leverage, margin calls, and liquidation events surrounding major macroeconomic announcements.
• Institutional investor communications or filings that might reveal portfolio adjustments in response to macroeconomic signals, contributing to short-term price moves.
• Academic and industry research advancing understanding of the interaction between macroeconomic news, liquidity conditions, and algorithmic trading behavior.

This episode highlights ongoing tensions between fundamental economic developments and the structural dynamics of modern financial markets. Without clearer data on trading behavior and leverage effects, the precise drivers of such counterintuitive price moves will remain partially obscured, underscoring the need for greater transparency and research into market microstructure.

Source: https://beincrypto.com/us-inflation-bullish-why-bitcoin-stocks-dumped/. This article is based on verified research material available at the time of writing. Where information is limited or unavailable, this is stated explicitly.